The biggest indicator of the importance of environmental, social, and corporate governance (ESG) investments is that their total market value will reach $53 trillion within the next five years – a colossal sum more than the combined GDP of the USA, UK, China and Germany.
ESG also represents a third of the assets under management, according to Bloomberg Intelligence. Real commitments are being made by buy-side players throughout the world into achieving net zero emissions by 2050 and restricting global warming to within 2 degrees above pre-industrial levels.
This includes the six member countries of the Gulf Cooperation Council (GCC), which are still heavily reliant on fossil fuels for a significant portion of their GDP.
Still, questions remain. What is the perspective on ESG in the Middle East? How is a region which has been so reliant on oil preparing for the future? Why is ESG data so important? When is the right time to disclose ESG data? How to navigate the plethora of ESG analytics? And how do you truly measure and compare performance?
Transitioning away from oil and gas is a major focus for GCC countries. Revenue from fossil fuels makes up 40 percent of the GDP in the GCC, except for Bahrain (where it is 20 percent), which has started to diversify.
Across the region, there is great urgency and purpose surrounding sustainability and sustainable development goal discussions. So much so, that the various economic visions of the countries and their ESG goals go hand in hand.
In the UAE, in a move designed to support and help finance the country’s Green Agenda 2015-2030, the Abu Dhabi Global Market (ADGM) last year launched its sustainable finance initiative.
The Abu Dhabi sovereign wealth fund, Mubadala, has also established a responsible investing arm, while First Abu Dhabi Bank (FAB), the UAE’s largest lender, and logistics behemoth DP World both have an A rating from the Carbon Disclosure Project.
The DFM launched the UAE Index for Environment, Social and Governance (ESG)
In addition, the Dubai Financial Market (DFM) also launched the UAE Index for Environment, Social and Governance (ESG) to encourage listed companies in the UAE to expand embracing ESG best practices.
These are but some examples of how ESG has quickly moved from the periphery of company and shareholder concern to center stage, with strong action around ESG likely to lower risk and bring returns, particularly in the medium- to long-term.
Seeing such a massive increase in investor demand for information around ESG, however, means that disclosure of data has become imperative, and the standardisation of data remains a challenge. That includes within the UAE, the region and wider afield.
Several data service providers have developed tools that will help to standardise and improve data to help investors navigate the transition towards a low carbon economy, as well as greenwashing risks.
Indeed, it is precisely because of the strong momentum of the industry that investors need to be cautious in evaluating the data and navigating the risk of greenwashing – or exaggerated claims of environmental compliance.
For example, the number of companies racing to set carbon targets increased 319 percent in 18 months, causing significant challenge for investors because the data is disparate, difficult to understand and impossible to compare.
Real commitments are being made by buy-side players throughout the world into achieving net zero emissions by 2050
It is a problem Bloomberg Intelligence is trying to solve with the development of BI Carbon – a curated dataset and score that answers critical questions in ESG. The initiative looks at where companies’ emissions are, where a company is planning to be in 2030 and 2050 with respect to carbon performance – and how this compares with peers and the requirements of the Paris Agreement to limit global warming by 2 degrees Celsius.
The ‘E’ in ESG – the environmental aspect – embodies climate risk and continues to be the acronym’s most dominant paradigm, both in the Middle East and throughout the world.
For climate-focused portfolio managers, the question is whether to divest assets that represent a climate risk, or to engage with companies in the hopes that they will transition. And portfolio managers all over the world use proprietary and third party data available via the Bloomberg Terminal to make these decisions. With COP26 (the 26th UN Climate Change Conference) coming up in November this year, however, it is expected that ESG disclosure will soon be pushed into financial accounting and reporting. In the race to net zero, it is another big indicator of the importance of ESG investments and how ESG can harness capital markets to drive change.
Benjamin Grolimund, Middle East and Africa Regional Manager, Financial Products – Bloomberg LP.
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